Financing Microfinance: the ICICI Bank Partnership Model
This paper examines the partnership model of financing MFIs, based on an analysis of traditional financing models and ICICI Banks experience in India.An internal analysis by ICICI Bank in 2002 revealed that clients could not access MFIs. The bank, therefore, pioneered a partnership model that attempted to separate MFI risk from portfolio risk, provide a mechanism for banks to incentivize partner MFIs and deal with the inability of MFIs to provide risk capital in large amounts. The model has the following key characteristics:
- Loan contracts directly between bank and borrower;
- Alignment of incentives with a first-loss guarantee structure;
- Transfer of implicit capital from the bank to the MFI through an overdraft facility.
The partnership model may prove critical in unleashing wholesale funds of Indian banks. It combines debt and mezzanine finance, enabling the MFI to increase outreach rapidly, while unlocking large amounts of wholesale funds available in the commercial banking sector in India. The paper also discusses building links to capital markets for financing microfinance through securitization. Finally, it highlights key enablers for an environment of rapid microfinance growth.
